Company Formation and Ownership : Why, When and What

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Company Formation and Ownership is possibly unknown to many intelligent peoples. It is quite important to know (or even if at all need so) the things around it. Previously we discussed How to Create Private Limited Company and what is considered to be Entrepreneurship. It is fact that we can earn quite nicely without any Company Formation.But why these various types of companies exists, why more complex wordings like Partnerships, sole ownership etceteras exists ? We are writing in an way that will be applicable to most of the Common Wealth Countries – its really not possible to describe tit bits of each Country – specifically of US and India, which are practically we know about and possibly this website gets visitors mainly from. There can be some names or forms that is absent in one Country (within the Common Wealth Countries) – like Limited Liability Company or LLC, Professional Limited Liability Company (PLLC). Many people are in business or professional services without knowing it. They ask the questions like Why I will Go for Company Formation and Pay More Tax (by percentage) when I am living quite well with current settings. Unfortunately, this current settings can land you behind the bar or to minimum, the Income Tax department can hunt your home to ‘digg out’ more ‘hidden treasures’. A practical professional business entity covers in many aspects plus you are really becoming”in business” which means something very different today than it was years ago, in a different tax and legal climate plus it is undeniable, even to consult a doctor, we run a Google Search now.

Both for US and India, the Government’s websites are more than enough for huge information. There are usually Business, Corporate, Non Profits – in this way they arbitrarily divides. Usually the portals starts with business dot gov.

Company Formation and Ownership : The Professional Service Providers Which Has Registration Numbers

Almost all socially important professions including Health Care, Law and Legal Degrees, Engineering (in some countries) provides a registration number or License number. This unique number plus the providers’ full profile is publicly available on Internet at official websites and on written request. This is to protect the consumers from frank cheaters. Usually a liability is added like annual case reporting. This basically has very less to do with Business itself. This designation of money earning is – Self Employed Professional. Which classically encircled the doctors and advocates. But with time, there are numerous “Self Employed Professional” works has been evolved – like Front End Designers, SEO, PPC experts etc. to name a few.
This typical or classical Self Employed Professionals usually get a bit more loan from the Banks, this is against their degree. The basic issue arises when the person, for example a doctor is paying his/her Income Tax. He/She is paying like an other common person not like a business. As the earnings can go up and down, without proper balance sheet; sometimes the Income Tax departments (this is specially for India) get over enthusiastic. The person is becoming liable for all his / her earnings and expenditures.
This is not definitely the right way for a person who is earning from a single source, that is providing only one kind of service, like treating patients and taking money. As there is no balance sheet calculation, the problem arises when the doctors’ office crosses the extent of only advice. A minor OT means, in that earnings, there is some investment from the doctor’s side too – like the Gauge Piece costs something. If the Patient has paid me $2000 USD and the patient needed Gauge, Cotton, Plaster of Paris etc. of $100, then the earning is not really $2000 USD. So, actually the flat lower percentage IT model will not give enough advantage anymore – one need to pay the IT on that $2000 USD, not on $1900 USD. Plus the cost of owning the instruments are also not deducted.
If you do not have an earning (per month) over $2000 USD and / or has only once source of income, you should possibly go and pay through this low percentage way of earning. Note that – the Letterhead, the Rubber Stamp is yours. You might not use certain things which a company can use (depends on Country) – that includes Free Hotline Number, Metallic Seal, Round Rubber Seal etc. plus it is mandatory to maintain some sort of indication which makes clear that the name is not of a company but of an individual. To make it clear – if there are degrees below the name, then it is an individual. A company can not have any degree (but is a body and can be rewarded). Otherwise, a company named John Moron and service provided by John Moron can confuse the peoples.

Company Formation and Ownership : But I am Not a Professional or Is Professional but Earn using Pure Business Model

If you have any establishment that provides some sort of service, according to the rules of the country, you must have a proper business ownership. That means a Lawyer Farm, a Religious Community’s Meet-up, a Hospital or Clinics will require some sort of Business License. Additionally, special permission might be required (with possible periodical checking) for certain establishments.
Ownership can be any – Partnership, LLP, LLC, Private Limited Company, Public Limited Company, Sole Proprietorship to Section 25 Company or Trust or Foundation.

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Company Formation and Ownership : Can You Clear the Advantages of Having a Private Limited Company?

Private Limited Company usually have two directors with the required digital identification number. Here, if the professional is one of the directors, he will get allowance from the company. Company will define their own targets, facilities. All the expenditures for Company’s purpose (like travel, living) – all are fully deducted from the gross income and net is calculated. All purchases is indirectly becomes a plus point from the Income Tax’s point of view.

As Company is a Body, it has to pay the Income Tax. The Directors will also pay their own IT as individual. Sergey Brin (Google, for example take very less – “dollar-a-year men”. This is legally right business model. As company is carrying all the costs, they have no separate earnings, in very simple words.

A Private Limited Company, in case of India, is the practical minimum to get the advantages provided by the Government and Banks. Financing, Loans becomes easier with a good balance sheet. So, if a doctor owns a Private Limited Company and opens an office (plus has other business), that $2000 USD paying plaster of paris-gauge-cotton example client becoming a client of the company. It is very safe as the other Employees can be controlled in a legal way. There are more legal things which are must to be maintained. Limited means – Limited by Liabilities – Google India Private Limited is not a small company itself ! People has a sort of dogma with the wordings – Private Limited Company. If you have a good growth, there is practically no difference with a Public Limited Company. A Private Limited Company in India is similar to a C-Corporation in the US. Private Limited Company allows the owners to subscribe to the shares by paying a share capital fees. It does not mean a real money – but the promise is, for example, Joe and Marry will start a Private Limited Company with $1000 shares each. The promise is here, after the financial year, there should be some growth. So, you understood – its wise option to start a Company just at the beginning of a financial year. Even if Joe and Marry starts with zero with $1000 shares each, within full 12 months, the chance to really accumulate $3000 total is more than starting one month before the year ending. Plus other costs will also increase.

A Public Limited Company (PLC) raises the fund from the Public – the Shareholders of Stock Market. This is quite complex and an entry level business must avoid it.

Company Formation and Ownership : Then the Non-Profits ?

Nonprofit organization can be a Trust, Societies and Sec. 25 Companies (in India). Sec. 25 Company is almost like a Private Limited Company except the business model – Non-profit – means it is for doing others’ good without any hope for monetary gain. Even if there is gain, that will be counted as to be used for others’ good. From Google to the Governments all has good donation, endorsement options for a non-profit. Trust, Societies has almost no liabilities but Sec. 25 Companies (in India) has liabilities. Regarding Tax exemption, this is the full copy paste :

Charitable purposes include “relief of the poor, education, medical relief and the advancement of any other object of general public utility.” Public charitable trusts, by definition, must be created for the benefit of the public. Societies likewise may be registered for charitable purposes. Section 25 companies are formed for the limited purposes of “promoting commerce, art, science, religion, charity or any other useful object.” Under amendments to Section 11(4A) of the Income Tax Act 1961, a not-for-profit organization is not taxed on income from a business that it operates that is incidental to the attainment of the objects of the not-for-profit organization, provided the entity maintains separate books and accounts with respect to the business.

If you are looking to get benefit by some cheating way, its not really possible, many tried before you! Only Google AdWords gives Advertisement worth 8K INR per day – then you can not run Google AdSense. It is becoming an arbitrage of policy. Without any investment with 130% usual return from Google AdWords, you will be earning near 10K INR per day, thats too not taxable! That is fully cheating and you will definitely land behind the bar under at minimum infamous 420 IPC, 1860. As India is unfortunately popular for harboring cheaters, many restrictions has been added now. You really need to do something good, which can be measured. If you have a good philosophy, you can open a charity beside your main business. It actually opens more opportunities for the main business.

For Caution for the Indians

As unfortunately, the number of divorce cases has increased quite significantly in some states like Maharashtra (First), West-Bengal (Second), any good advocate can give you better advice if you are an young unmarried male. Law always protects, but Law can be nicely abused too. Personally my opinion will be to read the Hindu Marriage Act or Special Marriage Act and Hindu Succession Act and discuss with your advocate, specially for Private Limited Company formation with a loan overhead. This is not distrust, this is a part of business strategy.

This article is not an expert advice.

We are not Advocates, Lawyers or Chartered Accountants, there might be some wrong unintentionally written. We wrote from our practical experiences, if you are an expert, please do not hesitate to correct us.

This article offers a generalized idea not equivalent to an expert’s advice.

We recommend to use Agencies which are known for decades – for IT purposes, Company formation etc.